HPQ: Blame Game Swirls as Analysts Warn Raft of Worries to Continue

By Tiernan Ray

The Street continued to discuss the implications of Hewlett-Packard‘s (HPQ) slightly-better-than-expected fiscal Q4 report this morning, and weakened outlook, even as various sources picked apart the details of the $8.8 billion charge the company has taken to write down the $12 billion acquisition last year of U.K. software maker Autonomy PLC.

After telling investors and analysts this morning that there were indications of fraud with the books at Autonomy before HP bought the company, former HP CEO Leo Apotheker, who made the decision to buy the software maker, responded to The Wall Street Journal‘s Rolfe Winkler through a representative later in the morning, stating that he was “stunned” to learn of the accounting issues, but that the due diligence performed at the time “was meticulous and thorough.”

A little later on, Mike Lynch, formerly CEO of Autonomy, told AllThingsD‘s Arik Hesseldahl in an interview by phone that he had been “ambushed” by HP’s accusations today, as he was never contacted in any official capacity by HP. Lynch told Hesseldahl HP has mismanaged the asset and “sabotaged its performance.”

Over at ZeroHedge, meantime, Tyler Durdensubmits what he calls the “scary story” for HP in a chart showing the debt-to-Ebitda ratio stretching back to 2006. Seen from that perspective, HP’s massive debt load — 4.5 times the amount of Ebitda left over after subtracting capital expenditures, as of July of this year — throws into stark relief the billions spent to “fund Ebitda and cash flow which will never materialize.”

Among some of the afternoon and evening notes that continue to flow in on the subject. There are worries about further margin erosion, about credibility (CEO Meg Whitman has said she regretted voting to approve the Autonomy deal in 2011), and worries about the company continuing to struggle with a very competitive PC market and areas of difficulty within enterprise sales:

Jayson Noland, R.W. Baird: Reiterates a Neutral rating and cuts his price target to $13 from $18. “We expect fundamentals to get worse before getting better and continue to model revenue declines through F14 (unlike consensus) [...] Management noted incremental pricing pressure in Europe and in “hyper-scale” servers. We expect margin pressure to be a recurring theme in many areas of the portfolio given an inability to differentiate relative to key competitors [...] Networking, 3PAR, Vertica, and security products were the bright spots in the quarter. We view these areas as strategic but only a mid-single digit percentage of revenue today.” Bachman cut his outlook for this year to $110.5 billion and $3.35 per share from a prior $116.5 billion and $3.66 per share.

Keith Bachman, BMO Capital: Reiterates a Market Perform rating and an $18 price target. “We have been negative on Autonomy since the initial announcement of the acquisition. Nevertheless, we think that the write-off reflects poorly both on the board and the existing management [...] Operating and free cash flows of $4.1 billion and $3.5 billion were much better than our forecast of $2.0 billion and $1.1 billion, driven by better working capital management as the cash conversion cycle improved by 6 days q/q and 5 days y/y [...] We think that the margins could remain at these levels as pressures from aggressive pricing, mix, and weak macro environment are unlikely to subside in the near to medium term, in our view [...] We think that it is difficult for us and investors to feel confident about the FY2013 guidance range given persistent top-line and margin challenges across all of HPQ’s businesses [...] Net, we are not recommending the stock even at current levels.”

Jim Suva, Citigroup: Reiterates a Sell rating on the stock and cuts his price target to $10.50 from $13.50. “We note that this is in addition to the $9.2 billion write down related to the EDS acquisition last quarter for a total of $18 billion of write downs in just 6 months (still $35b of intangibles left on the balance sheet). This will cause investors to be highly skeptical of HP’s M&A ability [...] We believe BYOD (Bring Your Own Device) is in its initial stage and will pose a major challenge to HP.” Suva cut his estimate for fiscal 2013 to $108.97 billion and $3.25 per share, down from a prior $115.6 billion and $3.40.

Richard Kugele, Needham & Co.: Reiterates an Underperform rating on the stock. “It was another challenging quarter for Starship NoSurprise, as they
continue their multi-year mission into either decline or GDP-level growth.
On virtually every front, HP saw material declines year-over-year in F4Q,
with further challenges expected in F1Q driven by macro and segmentspecific
headwinds. In our view, innovation is the only way out of this
wormhole, and spending $384M/qtr on buybacks and dividends siphons
off cash that should be in R&D. Reiterate Under Perform until the ship
begins to turn.” Kugele cut his estimate for this year to $113.6 billion and $3.48 per share from a prior $114.2 billion and $3.46 per share.

Shebly Seyrafi, FBN Securities: Reiterates a Sector Perform rating. “The reason that HPQ expects to achieve consensus F2013 NG EPS in spite of FQ1 being almost 20% below consensus is that it expects much of the headcount reduction actions to occur in FH2 2013. HPQ still expects to roughly 29,000 employees to depart (roughly 11,500 as of the end of F2012 and roughly 26,000 as of the end of F2013) [...] Due to weak PSG revenue of $8.7B (-8% Y/Y and below $9.0B consensus) and aggressive pricing, PSG operating margin declined to 3.5%, materially below the prior quarter’s 4.7% level and below
consensus of 4.7% [...] IPG (printing) margin improved to 17.5% from 15.8% the prior quarter and consensus of 15.5%. However, we expect printer operating margin to decline in FQ1 as HP reduces ink supplies channel inventory [...] Seyrafi cut this year’s outlook to $112.98 billion and $3.34 per share from a prior $115.8 billion and $3.53 per share.

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There are 4 comments

NOVEMBER 20, 2012 8:43 P.M.

They should just break HP apart wrote:

squeeze the shorts

NOVEMBER 20, 2012 11:48 P.M.

SiliconValleyRetard wrote:

Having seen majority of buyouts explode at one stage or another, it is clear these are financial shenanigans perpetrated by the so called financial wizards to line their pockets and the stoke the ego of C-level exec while they hollow out the very companies they swear loyalty to. Otherwise there is no reason for tech companies that have never turned a real profit over long stretches to be able to print currency in form of their bloated stocks.

NOVEMBER 21, 2012 8:51 A.M.

MM wrote:

Analysts are a joke. Most of the people had price targets a year or so ago for HPQ at $35-50 a share.

Analysts predict its going to rain after it has already started to rain.

Meanwhile they push AAPL like its going out of style after its run up.

About Tech Trader Daily

Tech Trader Daily is a blog on technology investing written by Barron’s veteran Tiernan Ray. The blog provides news, analysis and original reporting on events important to investors in software, hardware, the Internet, telecommunications and related fields. Comments and tips can be sent to: techtraderdaily@barrons.com.